Reuters: Buyout Funds to Shrink in Fundraising Wave

BERLIN, March 2 (Reuters) – Buyout firms piling back into fundraising markets this year face raising far less capital than for their previous funds as investors limit the amount they are ready to give private equity for deals.

Many big name private equity firms reaching the end of their investment periods or running low on capital in their current funds are finding investors — particularly large pension funds — have less money for them.

Faced by a wave of fundraisings, investors are also ready to limit the number of firms they are prepared to back, seeing fewer high-quality deals for buyout firms to chase.

“I see fund sizes will be dramatically smaller than they were last time around,” Bob Brown, managing director at Advent International, told the annual SuperReturn private equity conference on Wednesday.

Private equity firms raised close to $2 trillion for deals between 2006 and 2008, peaking at over $650 billion in 2008 alone, according to data and consultancy firm Preqin. That amount had slumped to some $225 billion in 2010, reflecting the sharp reduction in capital some investors have available for the asset class.

“Fundraising has still been difficult. It is picking up a bit, it isn’t what we saw in 2006-7, but you are seeing money coming back,” Carlyle co-founder David Rubenstein said Tuesday.

Buyout funds ballooned in size throughout the boom years as firms chased deals stretching into the tens of billions of dollars and new investors piled into the asset class seeking market-beating returns.

While deal sizes and volumes are inching back up following the credit crisis, and big U.S. pension funds are looking at private equity again to bridge their pensions funding gaps, they have much less to invest.

One that may have put $15 billion in private equity at the peak will invest $3 billion today; one that invested $5 billion may only put in $1.5 billion, said Advent’s Brown. Some believe smaller funds will be more in keeping with the size and quantity of potential deals.

“Fund sizes will be smaller and more appropriately linked to the available investment opportunities,” Terra Firma chairman Guy Hands said.

Most firms could raise about half the amount they are targeting and still operate effectively without having to make significant cuts, said Kathleen Bacon, managing director at fund of funds Harbourvest, though some big U.S. private equity houses would need more to support their larger staffs and higher overheads.

Increasing numbers of buyout firms who raised money at the peak but have now reached the end of their investment periods or have exhausted the money in their current funds, are expected to brave the market this year, a process that can take twice as long. Kohlberg Kravis Roberts & Co is just starting to raise a new North American-focused fund following Blackstone Group, which has just taken about two years to raise some $15 billion for a global fund.

BC Partners, seen as a bellwether for the market for European firms, is close to raising up to 3 billion euros ($4.15 billion), people familiar with the situation said, as a first step towards a new fund of almost 6 billion euros.

Other firms such as Cinven and Sweden’s EQT are seen raising new funds this year, while some in the industry expect Apax to come back to investors before the end of the year.

“We have 11 groups we are invested in who are in the market or will be in the market in the next two months,” said Kevin Tunick, managing director of private investment at UNC Management Company, which invests on behalf of the University of North Carolina.

As a result, some investors are taking the opportunity to pare down the number of funds they invest with.

“If you have four large cap relationships in Europe, you might decide you really only want two. They are all going after the same deals anyway,” said Billy Gilmore, investment director at Scottish Widows Investment Partnership.

(Story by Simon Meads and Megan Davies; additional reporting by Philipp Halstrick; Editing by David Holmes and David Cowell)